The John Marshall Journal of Information Technology & Privacy Law

Volume 29 Issue 4 Journal of Computer & Information Law Article 1 - Symposium 2012

Fall 2012

Turning Points in Telecommunications History, 29 J. Marshall J. Computer & Info. L. 513 (2012)

Paul J. Larkin, Jr.

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Recommended Citation Paul J. Larkin, Jr., Turning Points in Telecommunications History, 29 J. Marshall J. Computer & Info. L. 513 (2012)

https://repository.law.uic.edu/jitpl/vol29/iss4/1

This Article is brought to you for free and open access by UIC Law Open Access Repository. It has been accepted for inclusion in The John Marshall Journal of Information Technology & Privacy Law by an authorized administrator of UIC Law Open Access Repository. For more information, please contact [email protected]. 33953-sft_29-4 Sheet No. 3 Side A 10/02/2013 12:46:52 80 Stan- 9 e of Chaos Theory to be- .* R , J I was Assistant General Counsel for Verizon ARKIN 9 513 84 into a long distance company (AT&T) 84 into a long distance company J. L 9 ARTICLES AUL I. INTRODUCTION P -4\SFT401.txt unknown Seq: 1 2-OCT-13 8:46 77 Washington & Lee University; Senior Legal Research Fellow, 9 9 TURNING POINTS IN TURNING Is there one single, critical turning point in American telecommuni- critical turning point in American Is there one single, and his company to one side, the But if we leave Bell, his phone, * Paul J. Larkin, Jr., M.P.P. 2010 George Washington University; J.D. 1 TELECOMMUNICATIONS HISTORY TELECOMMUNICATIONS M K cations history? Put differently, was there one person, event, or institu- American telecommunications system tion in the development of the the rest in importance? That ques- that stands head and shoulders above quite difficult. The easy answer is (1) tion is either very easy to answer or of the telephone, and (3) either Alexander Graham Bell, (2) his invention Bell Company, the forerunner to and his later creation of the American Telephone & Telegraph Co., or one time parent company of the American the dissolution of AT&T in 1 (the Regional Bell Operating Com- and seven local exchange companies answer is easy because Bell, the panies (RBOCs) or Baby Bells). That as the “but for” cause of the current telephone, and AT&T clearly serve is like selecting (1) Abner Doubleday, telecom system in this country. It and (3) nine-person teams as the (2) bats, balls, and an infield diamond, “but for” cause of baseball. to answer with a high degree of confi- question becomes far more difficult argue that any attempt to identify a dence. Indeed, one could reasonably history of American telecommunica- single, critical turning point in the not be a devot´tions is doomed to fail. One need in the historical background to—letlieve that even minor variations ford Law School; B.A. 1 The Heritage Foundation. From 2004 to 200 Communications Inc. The views expressed in this article are my own and should not be construed as representing any official position of The Heritage Foundation or Verizon. I on would like to thank James Gatuso and Jonathan E. Nuechterlein for helpful comments an earlier version of this article. Any remaining errors are mine alone. \\jciprod01\productn\S\SFT\2 C Y 33953-sft_29-4 Sheet No. 3 Side A 10/02/2013 12:46:52 10/02/2013 3 Side A Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 3 Side B 10/02/2013 12:46:52 M K C Y 6). 99 34). 9 (1 creating the Federal 1 in order to address the 2 et seq. 6 34, 9 99 6, Pub. L. No. 104-104, 110 Stat. 56 (1 99 34, 42 U.S.C. §§ 151 9 -4\SFT401.txt unknown Seq: 2 2-OCT-13 8:46 9 Those inquiries truly have as much in common with asking the ques- Answering the question who was the most important person in tele- who was the most important Answering the question institution in telecom history? And what about the most important 2. The Telecommunications Act of 1 1. The Communications Act of 1 Communications Commission (FCC), and then stood on the sidelines as Communications Commission (FCC), to deal with AT&T? Congress also the FCC and state regulators sought Act of 1 later passed the Telecommunications problems created by the break-up of AT&T. Or was it Microwave Com- problems created by the break-up company whose entry into long-dis- munications Inc. (MCI), the upstart to start a chain of events that tance telecommunications helped AT&T? ultimately led to the dissolution of Ted tion, “Who was America’s greatest baseball player?” (Babe Ruth? Williams? Willie Mays? Henry Aaron? Roy Hobbs?) But, just as one 514 LAW & INFORMATION OF COMPUTER JOURNAL on—a influences and human technological the subsequent alone dy- [Vol. in- produce an exponential can like telecommunications namic system XXIX follow. Which system would that the the variety of pathways crease in amplifi- of long-distance The development the most important: event was transmis- devices? Microwave switching Automatic cation technology? A good Fiber optic cable? telephony? Cellular sion? Computers? made for each one. argument can be N. Vail, who history is no easier. How about Theodore communications and largely is positions in the Bell Telephone Company twice held senior nation- pursuit of what became the interconnected responsible for Bell’s Hubbard, a Bos- run by AT&T? Gardiner Greene wide telephone network Bell’s, who was one of friend of Alexander Graham ton lawyer and close hired Vail? The Bell of telephone service and who the early promoters Walter Brat- invented the transistor, John Bardeen, Labs scientists who Court Judge Harold Shockley? Federal District tain, and William that broke the Bell Operating Compa- Greene, who oversaw the lawsuit Perhaps, William Baxter, the As- nies (the “Baby Bells”) off from AT&T? Antitrust Division of the U.S.sistant Attorney General for the Justice settlement of that case with AT&T? Department, who negotiated the Ginn, two of the pioneers in wireless What about Craig McCaw or Sam communications? refused to adopt a general rule requir- Was it the Supreme Court, which thereby allowing AT&T to stand ing interconnection of common carriers, service? The Supreme Court also re- alone in local and long-distance local and long-distance service be ap- quired that the costs of operating of the system by state and local portioned between each component problems that bedeviled regulators, which led to the cross-subsidization twentieth century. Was it Congress, telecommunications throughout the Act of 1 which enacted the Communications \\jciprod01\productn\S\SFT\2 33953-sft_29-4 Sheet No. 3 Side B 10/02/2013 12:46:52 10/02/2013 3 Side B Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 4 Side A 10/02/2013 12:46:52 : Trade NUMBER 10 -4\SFT401.txt unknown Seq: 3 2-OCT-13 8:46 PURCHASE BELL’S PATENTS 9 WESTERN UNION’S DECISION NOT TO WESTERN UNION’S DECISION So with that in mind (and with apologies to David Letterman) let me (and with apologies to David Letterman) So with that in mind Ironically, the first item in the list is a mistake: Western Union’s Ironically, the first item in the list reshaping of traditional The nineteenth century saw a fundamental interstate telegraph message on Samuel F.B. Morse sent the first M K The telegraph changed the nature of speculation about crops and crop The telegraph changed the nature of speculation about crops and 2012] too, no lineup, so, entire starting up the not make does player baseball POINTS IN TELECOMMUNICATIONS TURNING in American indispensable be deemed or event should one person or person as any specific event in selecting The difficulty telecom history. American telecommunications factor in single most important being the 515 to explain factors can be used that no set of does not mean today also be reasona- example, it would we are today. For at where how we arrived advance of telecom- and persons accelerated the ble to ask what events new path, such telecommunications on an entirely munications, started only a clear vision of wireless service, or possessed not as the growth of established, but also system should be how today’s telecommunications in that direction. to lead or propel telecommunications the wherewithal question said that answering an unanswerable And, besides, whoever cannot be fun. or Events in Telecom- Important People, Institutions, offer my “Top 10 inventions, or These are ten noteworthy persons, munications History.” American telecommunications system. events that helped create today’s and at the end of the day most Most will not be a surprise to anyone, probably can be fit into two categories—technological developments or some part of the Bell System—and the people who managed all And Number One is the but each one is worth separate consideration. institution, and event in American single most important person, telecommunications. \\jciprod01\productn\S\SFT\2 decision not to purchase Bell’s telephone patents. decision not to purchase Bell’s telephone due to the development or ex- mechanisms for transmitting information networks: the United tension nationwide of four new communications Mail Service, Western Union’s tele- States Postal Service, the Railway system. The Western Union tele- graph system, and the Bell telephone important of the four. graph system was by far the most D.C., to Baltimore, Maryland: “What May 24, 1844, from Washington, in hath God wrought.” Western Union dominated the telegraph business the nineteenth century and became the first national communications stock company. Innovative as well, Western Union introduced the first ticker in 1866 and money transfer in 1871. The telegraph system changed American commerce in several fundamental ways. (1) C Y 33953-sft_29-4 Sheet No. 4 Side A 10/02/2013 12:46:52 10/02/2013 4 Side A Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 4 Side B 10/02/2013 12:46:52 M K C Y became HAPED THE 5 YSTEM FROM 0 S 9 S ]. AS H OSTAL 0 (Alfred D. Chandler, P 0) (codified as amended 9 9 (18 RANSFORMED 9 T NFORMATION MERICAN I A 55, 63, 82- OW ATION HE : H : T : The telegraph and the railroad : The telegraph and RESENT 0, 26 Stat. 20 9 EWS P : The telegraph led to the creation of : The telegraph led N NFORMATION Railroads I IMES TO THE 5). : The telegraph helped to support the perisha- : The telegraph helped T Newspapers 99 PREADING THE , S -4\SFT401.txt unknown Seq: 4 2-OCT-13 8:46 9 3 OLONIAL OHN C RANSFORMED BY 255-56 (1 T R. J ORSE 4 , however, before the Sherman Antitrust Act of 18 , however, before the Sherman Antitrust 9 M ATION Perishable goods ICHARD TATES FROM S In 187 Samuel F.B. Morse hoped that the federal government would oper- Samuel F.B. Morse hoped that the 4. R 5. Sherman Anti-Trust Act, Pub. L. No. 1 3. A N NITED RANKLIN TO law, Western Union abandoned the telephone business after losing pat- law, Western Union abandoned the over the telephone. The two compa- ent litigation with the Bell System the interstate communications nies settled their differences by dividing Union kept the telegraph line of busi- business between them. Western Jr. & James W. Cortada, eds., 2003) [hereinafter A N were “the ‘Siamese twins of commerce’”were “the ‘Siamese telegraph ran along because the to use just one track enabling the railroads the railroad rights-of-way, telegraph to traverse accidents and allowing the without innumerable rights of pas- needing to obtain separate property the country without sage. (4) the New York Associated Press, the forerunner to the Associated Press, Press, the forerunner to the New York Associated venture to obtain and newspapers entered into a joint as New York City quickly. (3) disseminate news ble goods industry. at 15 U.S.C. §§ 1-7 (2006)). ate the telegraph as it had with the Postal Service, which Morse saw as ate the telegraph as it had with the merchants thought that only the the forerunner of the telegraph. Private evenhandedly operate the telegraph. federal government could build and monopoly power that could be held if Private businesses also feared the system. Ultimately, however, the gov- only one firm operated a telegraph the telegraph system itself, dashing ernment decided in 1847 not to run would control the means of interstate Morse’s hopes that the government of the reason why the government de- communication in America. Part the new telegraph system was the cided not to nationalize and operate his supporters that, given the poten- belief held by Andrew Jackson and government should not be respon- tial power of the telegraph, the federal expanding the power of the federal sible for operating this system and government. U F 516 LAW & INFORMATION OF COMPUTER JOURNAL farmers gave information in transmitting delay the Previously, prices. [Vol.a decided ad- information of agricultural close to the source and others XXIX almost transmit information now the ability to over others. But vantage from ret- of speculation changed the nature nationwide instantaneously to the crea- the telegraph led That is, to prospective gambling. rospective or even not yet harvested for prices of crops futures market tion of a planted. of of futures markets led to the creation In addition, the birth those complex of Trade to coordinate and regularize the Chicago Board (2) futures transactions. \\jciprod01\productn\S\SFT\2 33953-sft_29-4 Sheet No. 4 Side B 10/02/2013 12:46:52 10/02/2013 4 Side B Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 5 Side A 10/02/2013 12:46:52 : 7 9 IO- H. 10 P INE NTERNET Express U.S. 4 ICHARD -L 66) (1832). MERICA I 9 N 9 A O S ’ (the 10 ICTORIAN 7 V Memphis & Little ENTURY HE C EXPRESS CASES , T EREGULATION IN D (J.P. Mayer trans., 1 INETEENTH TANDAGE N S 9 Over time, money transfers be- Over time, money MERICA OM 6 A N I It therefore is not surprising that the It therefore is not surprising that EGULATION AND 9 As Alexis de Tocqueville wrote, “[t]here 8 : R SEPARATIONS CASE SEPARATIONS NUMBER Massachusetts v. Envtl. Prot. Agency, 54 EMOCRACY ELEGRAPH AND THE See , D T OMPETITION -4\SFT401.txt unknown Seq: 5 2-OCT-13 8:46 9 AND THE C OCQUEVILLE TORY OF THE 8). T S 99 ONTRIVED , Short Message Service or SMS. T NEERS , C LEXIS DE viz. EMARKABLE 215-16 (1 .A The first United States Supreme Court decision, The first United States Supreme Name a contemporary social problem and there’s probably a way Name a contemporary social problem IETOR 7. this final message: “Effective 2006-01-27, The Western Union website showed 9 8. Even global warming. 6. Bell System constructed and operated a nationwide “[I]n telecommunications, the 4). R 10. 117 U.S. 1 (1886). Memphis L. R. Co. v. S. Exp. Co., M K THE SUPREME COURT’S DECISIONS IN THE THE SUPREME 99 HE T (1 and Commercial Messaging services. We re- Western Union will discontinue all Telegram and we thank you for your loyal patronage. If gret any inconvenience this may cause you, contact a customer service representative.” you have any questions or concerns, please mes- Ironically, the Western Union legacy has lived on after its demise in the form of “text saging”— K. V came Western Union’s primary line of business. Western Union ended its primary line of business. Western came Western Union’s 2006. service on January 27, telegraph communications (2007). Supreme Court would play an important role in the early shaping of tele- Supreme Court would play an important different Supreme Court decisions communications policy. In fact, two field in much the same way that the helped to define the telecom playing for baseball. foul lines lay down the playing field is hardly a political question in the United States which does not sooner is hardly a political question in the or later turn into a judicial one.” telephone network that was the envy of the world. Standardization, centralized control of telephone network that was the envy of the pricing produced high-quality service engineering and operations, and cross-subsidized And the earnings were sufficiently generous to that reached nearly all areas of the country. industrial research center.”support Bell Laboratories, the world’s preeminent R that it could arise in litigation. 2012] telegra- same for did the Bell from, while away walked which Bell ness, POINTS IN TELECOMMUNICATIONS TURNING but the to Western Union, telephone patents offered to sell the phy. Bell a reasona- the decision was at the time the deal. Perhaps, latter refused communica- power in then by far the superior telegraphy was ble one; 517 Over the mistaken judgment. it to be a history has proved tions. But of cus- in the number eclipsed telegraphy century, telephony twentieth of income gen- number of messages sent, the amount tomers served, the The Bell other relevant feature of communications. erated, and in every & Telegraph Com- as the American Telephone Company, later known telecommunications became the world’s preeminent pany, or just AT&T, largest corporation. firm and America’s \\jciprod01\productn\S\SFT\2 Rock Railroad Company v. Southern Express Company. Rock Railroad Company v. Southern C Y 33953-sft_29-4 Sheet No. 5 Side A 10/02/2013 12:46:52 10/02/2013 5 Side A Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 5 Side B 10/02/2013 12:46:52 M K C Y 12 ., Wick- e.g involved , 0, 18 U.S.C. 99 See . art. I, § 8, cl. 3, as ONST 5) (holding unconstitutional as Separations Case Smith v. Illinois Bell Tele- 99 (1 9 The American system of gov- . 30). The 9 The Court therefore refused to The Court therefore 9 13 14 ). 11 . at 20-2 See id 42) (holding that Congress can regulate a small-scale 9 Separations Case -4\SFT401.txt unknown Seq: 6 2-OCT-13 8:46 9 was whether railroads must serve as common carriers serve as common railroads must was whether (the ., United States v. Lopez, 514 U.S. 54 e.g . at 21. , Id ), arose in the context of railroad transportation. Like telecommu- Like transportation. of railroad context in the ), arose See The second Supreme Court decision was The second Supreme Court decision Express Cases 12. 13. Smith v. Ill. Bell Tel. Co., 282 U.S. 133 (1 14. The Supreme Court has read the Commerce Clause, U.S. C 11.on exclu- The Court explained that railroads had made investment decisions based ard v. Filburn, 317 U.S. 111 (1 inter- activity such as home-grown wheat if the nationwide sum of that activity can affect home- state commerce); Gonzales v. Raich, 545 U.S. 1 (2005) (stating the same result for grown cannabis). Recently, the Supreme Court has concluded that Congress’ Commerce re- Clause power cannot be expanded indefinitely and has limited Congress’ power in this gard. a broad grant of authority to Congress to regulate virtually any activity that has any re- a broad grant of authority to Congress to mote relationship to interstate commerce for most of the twentieth century. ernment consists of a complex, confusing mix of federal and state ernment consists of a complex, public policy, including commerce. jurisdiction over most aspects of commerce by virtue of what is States have the authority to regulate while Article I of the U.S. Constitu- called their inherent “police power,” “interstate” commerce. The two tion empowers Congress to regulate understanding the difference between grants of authority overlap, and occupies most of a first-year state and federal regulation of commerce law. law school course in constitutional order the interconnection of different railroad lines—thatorder the interconnection of different is, to make any carrier of common carriers.” one or all such companies “a common not only for individuals and shippers, but also for each other. That is, also for each other. shippers, but for individuals and not only with its own allow every other one to interconnect must each railroad to take advantage roundhouses, etc.) in order facilities (track, switches, (as an economist monopoly “bottleneck facilities” of so-called natural to select different car- allow customers the opportunity might say) and to might say)? By throughout the nation (as a consumer riers for transit to interconnect and had required telegraph companies statute, Congress made that the same firm’s traffic, so the argument was transmit another The Supreme Court, apply in the case of the iron horse. principle should concluded that, for rejected that theory. The Court however, expressly the common carrier the common law underpinnings of several reasons, extend quite that far. doctrine did not exceeding Congress’s commerce power the Gun-Free School Zones Act of 1 nications, rail transport has been deemed a “common carrier” that must a “common carrier” been deemed rail transport has nications, is subject terms and that on nondiscriminatory to all parties be available The issue in and service. as to its rates, routes, regulation to government the sivity, railroads had never held themselves out to other railroads as willing to serve them sivity, railroads had never held themselves the public, requiring interconnection might dis- on the same basis that a railroad served and there was no tradition of railroads serving rupt a railroad’s ability to serve the public, as common carriers for each other. 518 LAW & INFORMATION OF COMPUTER JOURNAL Cases [Vol. XXIX \\jciprod01\productn\S\SFT\2 phone Company 33953-sft_29-4 Sheet No. 5 Side B 10/02/2013 12:46:52 10/02/2013 5 Side B Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 6 Side A 10/02/2013 12:46:52 9 at Id. at 2642-76 Id. Separations The result was 15 and the 8 (2000) (holding unconstitu- 9 , the Court held that the , the Court held U.S. 5 9 Smith (opinion of Roberts, C.J.); 9 Express Cases , an accounting process that divided the , an accounting process viz. -4\SFT401.txt unknown Seq: 7 2-OCT-13 8:46 9 , 132 S. Ct. at 2577-260 88 ed. & Supp. V), which made it a crime to possess a firearm in the 88 ed. & Supp. V), which made it a crime 9 Sebelius , 282 U.S. at 146-62. Smith defined how the Bell System operated for most of the twentieth cen- defined how the Bell System operated Together, the decisions of the The Supreme Court adopted a regulatory theory that distinguished adopted a regulatory theory that The Supreme Court -42 (opinion of Ginsburg, J.). How the law will play out in this area remains to be 9 (2010)). Five justices concluded that there are limits on Congress’s Commerce Clause, 15. 22(q)(1)(A) (1 9 M K 9 the “station-to-station” theory—wasthe “station-to-station” York call from New that a phone 260 seen. (Scalia, Kennedy, Thomas, & Alito, JJ., dissenting), but the five Justices were not all on the (Scalia, Kennedy, Thomas, & Alito, JJ., dissenting), but the five Justices were not all same side of the judgment. By contrast, Justices Ginsburg, Breyer, Sotomayor, and Kagan concluded that the Act was a lawful exercise of Congress’ Commerce Clause power. the system of “separations”— capital costs of operating the Bell System had to be allocated between the the Bell System had to be capital costs of operating and the interstate toll service. local exchange service costs of telecommunications capital into state and interstate compo- capital into state and costs of telecommunications accordingly by the regulators involved. nents, so that prices could be set service, but were limited to the in- The states could regulate telephone facilities and service must be trastate facilities and service. Interstate and only the federal government “separated” from its intrastate aspects, of telecommunications. had jurisdiction over those elements tury. Gaul may have been divided into three parts, but America’s tele- tury. Gaul may have been divided local exchange service and long-distance phone system had but two – the Bell System and AT&T owned both of them. Historically, service – to local service, which was regulated preferred to allocate all of its costs in order to recapture common capital under the rate-of-return system, State and local regulators, however, costs in the ratemaking process. of its common capital costs to its wanted Bell to allocate some portion vicinity of a school); United States v. Morrison, 52 vicinity of a school); United States v. Morrison, § tional a statute making rape a federal crime). was The Court’s latest foray into this issue S. Ct. 2566 (2012) (which involved the constitu- Nat’l Fed’n of Indep. Bus. v. Sebelius, 132 Care Act, Pub. L. No. 111-148, 124 Stat. tionality of the Patient Protection and Affordable 11 but there was no majority opinion. Chief Justice Roberts and Justices Scalia, Kennedy, to Thomas, and Alito concluded that Congress lacked power under the Commerce Clause adopt that law, 2012] over telecommunications authority that regulatory of how the question POINTS IN TELECOMMUNICATIONS TURNING One theory— governments. state and federal between the was divided entity that as an indivisible be treated Francisco should City to San 51 government. by the federal regulated only could be The competing components call into three down a phone theory broke “board-to-board” intrastate New York be regulated separately: (i) the each of which must element regu- by the Empire State; (ii) the interstate element regulated California ele- government; and (iii) the intrastate lated by the federal the Golden State. ment regulated by commerce. In intrastate from interstate \\jciprod01\productn\S\SFT\2 Case C Y 33953-sft_29-4 Sheet No. 6 Side A 10/02/2013 12:46:52 10/02/2013 6 Side A Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 6 Side B 10/02/2013 12:46:52 M K C Y but to 16 765-67 (2d OLICY FOR THE OLICY P P 13 9 AW AND 4). Over time, several dif- L 99 note 16, at 763-64. ELECOMMUNICATION 66-68 (1 , T supra ., ROCK B ELECOMMUNICATIONS ET AL OMPETITION 34 provided that issues relating to separations , 9 C ., T ERALD , different rates for the same service. Urban custom- , different rates for the same service. Urban NUMBER 8 viz. ET AL , ENJAMIN ONOPOLY TO -4\SFT401.txt unknown Seq: 8 2-OCT-13 8:46 M 9 ENJAMIN B ROM 47. That manual divided telecom plants and facilities into portions sub- 47. That manual divided telecom plants and : F 9 INOR THE KINGSBURY COMMITMENT OF 1 THE KINGSBURY GE M A That scheme of cross-subsidization lasted only as long as AT&T lasted of cross-subsidization That scheme TUART 17 AT&T went through several stages, from competition (against West- several stages, from competition AT&T went through 17. The Communications Act of 1 16. Marginal-cost pricing is optimal in a competitive industry. By contrast, that pric- NFORMATION ed. 2006). should first be presented to a Joint Board of federal and state commissioners before being should first be presented to a Joint Board The Joint Board adopted its first formal separa- submitted to the FCC for a final decision. tions manual in 1 ject to federal or state jurisdiction. G serve the political necessity of keeping local exchange rates low for con- exchange rates of keeping local political necessity serve the ser- and telecommunications of other parties at the expense sumers vices. ferent subsidies gained hold. Business customers subsidized private customers through ferent subsidies gained hold. Business customers higher business telephone rates— ers subsidized rural customers because both groups paid the same rate—which meant that to they paid the same rate for different services, different because urban service is subject rural economies of density, which makes the cost of adding a new consumer less than in phone areas. Interstate customers subsidized local customers through higher long distance provid- rates, resulting from an arbitrary allocation of a greater amount of the fixed cost of ing telephone service to long distance than to local exchange traffic. And so-called “vertical services”—e.g., caller identification, call waiting, call forwarding, speed dialing—subsi- dized basic exchange service. B remained the sole provider of long-distance telephone service. Once the provider of long-distance telephone remained the sole the courts allowed ri- Commission (FCC) and Federal Communications “cream skimming” by line of business and engage in vals to enter that sys- long-distance service, the cross-subsidization underpricing AT&T’s tem came undone. ern Union) to monopoly (due to its settlement with Western Union and (due to its settlement with ern Union) to monopoly rival telephone companies (once its own patents) to competition against regulated monopoly status. the original patents expired) to, ultimately, several antagonists. Independent tele- For a while, the Bell System had consumers disliked Bell’s mo- phone companies disliked Bell’s monopoly; imperial-service attitude; the states nopoly (read: high) prices and consumers (read: voters); and the fed- disliked the high prices charged as socially inefficient. eral government saw Bell’s monopoly ing approach would not allow a natural monopoly with high fixed costs, such as telecommu- ing approach would not allow a natural monopoly nications, to recover its fixed costs. Pricing Ramsey Pricing is an alternative. Ramsey demand is inelastic and decreasing prices achieves its goals by increasing prices where contrary to the historic telephone cross-subsidy where demand is elastic. The result is that, decrease and local exchange rates would in- pricing scheme, long distance rates would crease. S I 520 LAW & INFORMATION OF COMPUTER JOURNAL a was The result low. local costs to keep in order business, interstate [Vol. real- to reflect the economic designed not accounting measures series of XXIX long-distance service, local and cost of providing ity of AT&T’s \\jciprod01\productn\S\SFT\2 33953-sft_29-4 Sheet No. 6 Side B 10/02/2013 12:46:52 10/02/2013 6 Side B Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 7 Side A 10/02/2013 12:46:52 30s, 9 2-OCT-13 8:46 9 1). 99 6, Pub. L. No. 104-104, 110 Stat. 99 21) (codified as amended at 47 U.S.C. 9 . 42, 171-73 (1 13 proved to be a major success for 9 IST H Y 13 by agreeing to divest itself of West- 13 by agreeing to ’ 9 OL 13 resolved all of AT&T’s other problems. 13 resolved all of P 9 OF , 3 J. in order to lift the restriction in the Kingsbury in order to lift the restriction in 9 1 The Telephone Problem and the Road to Telephone Regulation in 18 -4\SFT401.txt unknown Seq: 9 21 9 the Telecommunications Act of 1 repealed by . 27 (1 Willis-Graham Act, ch. 20, 42 Stat. The Kingsbury Commitment of 1 the federal government took con- Ironically, during the Great War Over time, however, AT&T ultimately won the contest. AT&T ac- AT&T contest. won the AT&T ultimately time, however, Over 9 1 18. Jeffrey E. Cohen, 84, when a federal district court broke up AT&T into one long distance district court broke up AT&T into 84, when a federal M K 9 § 221(a)) Bell had eighty percent of the local exchange customers, ninety percent Commitment on the Bell System’s acquisition of other telephone compa- Commitment on the Bell System’s grew dramatically. By the early 1 nies. As a result, the Bell System 56, § 601(b)(2) (codified at 47 U.S.C. § 151 (2006)). AT&T. AT&T prevented the federal government from nationalizing the AT&T. AT&T prevented the federal in some other nations, and also telephone industry, as had occurred governments to adopt favorable reg- helped prompt the state and federal monopoly status and avoiding ulatory systems. By accepting regulated antitrust litigation, the Kingsbury both governmental ownership and System to achieve its four business Commitment helped enable the Bell local exchanges owned by AT&T via goals: (1) horizontal integration of long-distance communications; (2) AT&T’s monopoly over interexchange into equipment manufacturing; and (3) backwards vertical integration leasing of retail equipment to con- (4) forward, vertical integration into regulation was a small price to pay sumers, rather than sales. State price for monopoly status. ern Union, not to acquire additional independent telephone companies, acquire additional independent ern Union, not to local exchanges) with its interstate lines (but not its and to interconnect The result was willing independent phone companies. the local lines of that lasted until a regulated monopolist, a status that AT&T became 1 seven Baby Bells. company and the for national defense purposes and trol of the telecommunications system had the technical know-how to oper- learned that only the Bell Company Accordingly, after the War the govern- ate a national telephone system. to have just one company supply ment decided that it was desirable telecommunications service nationwide. Congress passed the Willis- Graham Act of 1 AT&T pacified state regulators and consumers by agreeing to state regu- regulators and consumers by agreeing AT&T pacified state government in service. AT&T appeased the federal lation of rates and of 1 the Kingsbury Commitment quired the backing of the J.P. Morgan Company, giving AT&T more fi- giving AT&T J.P. Morgan Company, backing of the quired the bear. AT&T could bring to independents resources than the nancial companies telephone the independent bought off, or defeated, therefore independents monopoly. Some against AT&T’s up their fight who gave it. The than compete against AT&T, rather to be acquired by decided of 1 Kingsbury Commitment the United States, 1876-1917 2012] POINTS IN TELECOMMUNICATIONS TURNING 521 \\jciprod01\productn\S\SFT\2 C Y 33953-sft_29-4 Sheet No. 7 Side A 10/02/2013 12:46:52 10/02/2013 7 Side A Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 7 Side B 10/02/2013 12:46:52 M K A C Y 21 EGULA- Carroll , R th ed. 2008); 9 ( ISCUSI AT&T truly 4 (6th ed. 2006). 60s.) The gen- V 20 9 IP ORTS 47). 9 T OLICY Under that stan- P 22 68); W. K 9 (2d Cir. 1 (1 9 ATERIALS ON EGULATORY M ORTS R T F.2d 16 9 AW AND AW OF ASES AND L L , C NUMBER 7 NUMBER PSTEIN A. E DMINISTRATIVE ., A standard limited the circumstances in which a plaintiff could standard limited the circumstances in which -4\SFT401.txt unknown Seq: 10 2-OCT-13 8:46 9 ICHARD NTRODUCTION TO THE note 18, at 173-74. I ET AL ., R N , , A supra see, e.g REYER 23 Carroll Towing TREATMENT OF THE REGULATION OF BUSINESS TREATMENT OF LEMING standard adopted by Judge Learned Hand. standard adopted by Judge Learned G. B In the nineteenth century, regulation was done several ways, but century, regulation was done In the nineteenth Another example of the use of the courts as regulatory agencies can Another example of the use of the G. F 22. United States v. Carroll Towing Co., 15 23. pe- The tort law, some have argued, was very favorable to businesses during this 21. com- As Supreme Court Justice and professor Stephen Breyer has explained: “The 20. Cohen, DEVELOPMENT IN THE LEGAL, ECONOMIC, AND POLITICAL IN THE LEGAL, ECONOMIC, DEVELOPMENT TEPHEN OHN J riod. The common regulatory structure involved application of tort law by the structure involved application common regulatory private, particularly American tort law regulated courts. English and for damages liabil- principally by defining a standard business, conduct such as implied (Contemporary tort liability theories, ity in negligence. the 1 liability, were not born until warranty and products conduct could sustain liability, so eral rule was that only “unreasonable” the defendant acted reasonably. the question in each case was whether a “reasonable man” would have done The answer was contingent on what in turn, hinged on whether the costs of under like circumstances, which, discounted cost or expected loss of po- further precautions exceeded the of the legal standard appli- tential damage. The best-known explanation torts was the famous cable to most instances of nonintentional there were two common denominators: reliance on the common law as denominators: reliance on there were two common as enforcers. to be enforced, and use of the courts the source of rules had become America’s telephone company. America’s telephone had become dard, the defendant was guilty of negligence if the loss it caused, dis- dard, the defendant was guilty of occurring, exceeded the burden counted by the likelihood of the accident could have taken to avert the of the precautions that the defendant accident. recover for injuries caused by his employer to instances of “unreasonable-as-inefficient” fellow- conduct. Atop that, companion doctrines such as assumption of the risk and the servant rule made it even more difficult for an employee to recover against an employer vehicle under traditional tort theories. In sum, although tort law was perhaps the principal For a for regulating business conduct, it is unclear how well tort law performed that task. regu- discussion of those doctrines and the historical and contemporary uses of tort law to late business, mon law is emphatically a regulatory system. It depends on the creation and enforcement, mon law is emphatically a regulatory system. private property and freedom of contract.” by law, of a set of rights, notably those creating S 522 LAW & INFORMATION OF COMPUTER JOURNAL equip- telephone of all percent ninety-two traffic, local exchange of the [Vol.percent of the one hundred and almost (via Western Electric), ment sales XXIX Division). the AT&T Long Lines traffic (via long-distance \\jciprod01\productn\S\SFT\2 Towing 33953-sft_29-4 Sheet No. 7 Side B 10/02/2013 12:46:52 10/02/2013 7 Side B Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 8 Side A 10/02/2013 12:46:52 15 27 ER- 9 , 57 , 224 4 (1st 9 9 note 23, NTELLEC- I 2, 7 ERSPECTIVE N 9 P supra : A U.S. 20 , 9 150 (2005); H HOICE 3); Standard Oil Co. C MERICA 99 72) (“Antitrust laws . . . A 9 NTERPRISE 5) (“Antitrust is economic UBLIC NTERPRISE E 99 37, at 30-32, 56-64, 125-26 P AW IN E 9 Federal antitrust law Federal HE L 26 6, 610 (1 : T 9 ORT NTITRUST 1836-1 , T A NTITRUST ) (“It is the theory of the antitrust laws Once described as the “Magna as the described Once AW 9 A HE 4 ., Town of Concord v. Bos. Edison Co., HITE the Sherman Act seeks to protect Act seeks to the Sherman 24 9 L NTITRUST HE , T 25 e.g 1. W A , T 9 ix (2d ed. 2001). note 21, at 7 (“[A]ntitrust is a form of regulation – a note 21, at 7 (“[A]ntitrust is a form of regulation – AW MERICAN DWARD L OVENKAMP A 3, 305-06 (1 9 OVENKAMP supra H ., 67); H Antitrust and Monopoly: The Goals of Antitrust Policy 9 ONSEQUENCES OF NTITRUST C ET AL (2002); G. E -4\SFT401.txt unknown Seq: 11 2-OCT-13 8:46 , , A 0). 9 ERBERT 99 NTERPRISE AND REYER OSNER , E 80). . 242, 244 (1 ITIGATION 9 AUSES AND ., Brooke Grp. v. Brown & Williamson Tobacco Corp., 50 ., B EV L A. P (1 C e.g Be True to Your School: Chicago’s Contradictory Views of Antitrust and Regu- Be True to Your School: Chicago’s Contradictory e.g . R , Sherman Anti-Trust Act §§ 1-7. , BERT HE TUAL T CON See See See OVENKAMP 28 ISTORY 88); Robert H. Bork, ICHARD HROUGH in 9 , . E H H T 1). 3) (“It is axiomatic that the antitrust laws were passed for ‘the protection of competi- Another approach during the nineteenth century rested on a combination of contract the nineteenth century rested on a combination Another approach during 24. 28. 25. United States v. Topco Assocs., Inc., 405 U.S. 5 26. Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 455-56 (1 27. M K 99 99 MER A at 1; R (1 therefore is a form of economic regulation of markets and businesses. of markets and regulation is a form of economic therefore F.2d 17, 21 (1st Cir. 1 Carta” of our free enterprise system, our free enterprise Carta” of the public against anticompetitive conduct. against anticompetitive the public type of market intervention in an economy whose nucleus is private markets”); Fred S. type of market intervention in an economy McChesney, (1 tion, not competitors.”); Grappone, Inc. v. Subaru of New England, 858 F.2d 7 Cir. 1 and corporation law. The contemporary public utility doctrine grew out of the nineteenth The contemporary public utility doctrine and corporation law. “franchises,” should be some state-created corporations, deemed century principle that reason was that the for- general state-authorized corporations. The treated different from monopolies. Initially, a public interest,” since they were natural mer were “affected with to construct a particular by the state for specific purposes, e.g., corporations were chartered conditions into corpo- corporations in three ways: by inserting bridge. The state regulated quo warranto actions such charters, or in litigation through rate charters, by repealing time, however, public opposition to the privi- brought by the state attorney general. Over to enact general corporation laws allowing leged status of early corporations led the states form. As the consequence, however, control any qualifying business to assume corporate state attorney general to a board of directors over a corporation was transferred from the supervise corporate officers, and the share- and the shareholders. The board could directly officers and the board for a violation of holders could seek relief in court against corporate their fiduciary duties. H are the Magna Carta of free enterprise. They are as important to the preservation of eco- are the Magna Carta of free enterprise. They as the Bill of Rights is to the protection of nomic freedom and our free enterprise system our fundamental freedoms.”). of Ca. v. United States, 337 U.S. 2 that the long-run advantage of the community depends upon the removal of restraints that the long-run advantage of the community upon competition.”). lation regulation. Its essence is the regulation of certain types of economic relationships: horizon- regulation. Its essence is the regulation of between competitors to combine (by merger or tal agreements to fix prices, agreements otherwise), and so forth.”) (footnote omitted); 323, 328 (Fred S. McChesney & William F. Shughart II eds. 1 323, 328 (Fred S. McChesney & William F. 2012]of 18 Act Sherman in the be seen POINTS IN TELECOMMUNICATIONS TURNING 523 and protect consumer welfare Act is to promote of the Sherman The goal restraints of “unreasonable” by outlawing process the competitive trade. TION \\jciprod01\productn\S\SFT\2 C Y 33953-sft_29-4 Sheet No. 8 Side A 10/02/2013 12:46:52 10/02/2013 8 Side A Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 8 Side B 10/02/2013 12:46:52 : M K C Y 80s 9 ). CTIVITY 999 A 18 (1 In the 1 30 CONOMIC E NDUSTRIES I 70s. Economists, mem- 70s. Economists, 9 APERS ON 9 2 EGULATED P , R ROOKINGS B , air transport, trucking, railroads, and , air transport, trucking, railroads, ELLHORN G e.g. in , RNEST 4). & E -4\SFT401.txt unknown Seq: 12 2-OCT-13 8:46 99 9 IERCE 8-17 (1 J. P 31 . at 14-18. 0s, advocates for regulatory reform turned their attention to the 0s, advocates for regulatory reform ICHARD Id 99 . Broadly speaking, contemporary regulation can broadly be placed into two catego- Telecommunications regulation was originally justified on neoclassi- Telecommunications regulation was The debate changed dramatically in the 1 The debate changed The New Deal signaled a change in how regulation would be per- be would how regulation in a change signaled New Deal The 9 31. 30. R 2 ICROECONOMICS M and 1 “network industries”—natural gas, electricity, and telecommunica- tions—withrole of unregulated competi- the same goal of increasing the monopoly in providing goods tion and decreasing the role of regulated and services. financial services. “Deregulation of those markets produced dramatic, so- financial services. “Deregulation of case, consumers are now saving many cially beneficial results. In each of deregulation.” billions of dollars per year as a result cal grounds as necessary to prevent price gouging by a natural monopoly. cal grounds as necessary to prevent bers of Congress, and even some members of regulatory agencies came to bers of Congress, and even some members was sclerotic and harmed consum- believe that economic regulation often competition. The market was seen ers by protecting incumbents against welfare than the halls of the as a better forum for advancing economic to experiment with deregulation in regulatory agencies. Congress began several important markets, formed. agencies. by administrative now would be conducted Regulation in the post dramatic evolution change was the reason for this Why? One market. markets to a national a series of local economy from Civil War this new of regulating states were incapable was that the The result on states by imposed of law (due to limitations as a matter market both practicality (due to a Clause) and as a matter of the Dormant Commerce its borders). Another enforce state law dictates beyond state’s inability to equipped to un- that standing agencies were better factor was the belief generalists; they ordi- task than courts. Judges are dertake a regulatory field. Judges cannot specialists in any particular narily are not they must await the out to address social problems; proactively reach regulations to And judges cannot issue broad-based filing of a lawsuit. issue a judgment in a social problems; they can only address large-scale specific parties. particular case involving ries. Economic regulation involves the control of entry, exit, rates, and other business or ries. Economic regulation involves the control Social regulation involves the control of eco- financial conduct of firms in a given market. human life, health, or the environment. Dur- nomic externalities or activities that imperil the public supported economic regulation and ing the first half of the twentieth century, of the opposed social regulation, while the opposite was generally true for the second half twentieth century. The difference perhaps was due to a fear of big business, the occurrence growth of the Great Depression prior to WWII and the tremendous post-WWII economic and rise of concern with quality of life factors. Clifford Winston & Robert W. Crandall, Explaining Regulatory Policy 524 LAW & INFORMATION OF COMPUTER JOURNAL [Vol. XXIX \\jciprod01\productn\S\SFT\2 33953-sft_29-4 Sheet No. 8 Side B 10/02/2013 12:46:52 10/02/2013 8 Side B Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 9 Side A 10/02/2013 12:46:52 33 NTI- ATION A RGANI- MERICAN O 5 (2006). 9 A 3- 9

NDUSTRIAL HAPING I EGULATION AND ., S R CONOMICS 0s has increased ele- 0s has increased E ODERN 99 , M AND , CONOMICS OF ERLOFF OLICY note 4. , P ., E TERLING ET AL M. P S supra ET AL , But over time the natural monopoly time the natural But over , 32 EFFREY OHN ECHNOLOGY ; J NUMBER 6 & J T ISCUSI 99 V HRISTOPHER 1- IP 9 ARLTON ISTORY OF -4\SFT401.txt unknown Seq: 13 2-OCT-13 8:46 9 W. C : A H note 3, at TECHNOLOGICAL DEVELOPMENTS ENNIS supra ., D , e.g 13, the Bell Company acquired patents for its long-distance 13, the Bell Company acquired , TRUST 9 ZATION See 104 (4th ed. 2005); W. K 535 (4th ed. 2005); C The telecom industry has not been entirely deregulated although has not been entirely deregulated The telecom industry This subject is one that military pilots would call a “target-rich envi- This subject is one that military pilots In 1 33. provided the blueprint for the layout of the The U.S. Postal Service’s organization 32. M K ELECOMMUNICATIONS RANSFORMED wireline telecommunications system. For a discussion of the Postal Service, see A N theory became less and less persuasive. The reason was twofold: (1) tech- reason was twofold: persuasive. The less and less theory became showed communication, in wireless developments, particularly nological the unduly ex- could exist in communications without that competition Plain Old Telephone necessary for traditional, wireline pensive build-out rivalry in telecommu- POTS); and (2) as the ability for Service (known as treating AT&T as an be a reality, the justification for nications came to entity melted away. indivisible, monolithic in that direction. In- has gone a long way wireless telecommunications legislation that passed in the 1 deed, some federal as discussed below. of wireline telecommunications, ments of regulation politics, rather than is governed by the laws of But insofar as regulation of telecom regulation always will the principles of economics, the extent vary over time. remain a subject for debate and will ronment,” so only a few need be mentioned. For example, Alexander Gra- ronment,” so only a few need be mentioned. 1876, and the telephone switchboard ham Bell invented the telephone in allowed for a far more effi- came about two years later. The switchboard because it permitted use of a hub- cient telecommunications network one that the United States Postal Ser- and-spokes network, just like the in the John Adams Administration. vice had implemented beginning amplification technology, the audion. The audion was the first vacuum Bell a major lead over competing tube electronic amplifier, which gave service, to which every independent telephone systems in long-distance interconnection. The result was that local exchange company needed far fewer lines.more people could be networked with Similarly, the lay- the United States and Great ing of the transatlantic cable connecting such cables, helped bind people Britain in 1858, the first of numerous and commerce together internationally. T T 2012]a product for demand that if the taught microeconomics Neoclassical POINTS IN TELECOMMUNICATIONS TURNING by one firm at the lowest cost can be satisfied relevant market within a whatever a natural monopoly, the market is by two or more, rather than in it. number of firms the actual 525 \\jciprod01\productn\S\SFT\2 C Y 33953-sft_29-4 Sheet No. 9 Side A 10/02/2013 12:46:52 10/02/2013 9 Side A Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 9 Side B 10/02/2013 12:46:52 M K C Y W. RIC & E 27, combined , such as switches 9 OUSEL And the Internet, consulting, systems inte- J. H 36 HOMAS network equipment 46-47 (2001). , such as processing, storage, and termi- EVOLUTION The Benefits of Broadband and the Effects of Regu- hardware R (performed by EDS, Anderson Consulting, Computer The creation of broadband communication to The creation of broadband communication 35 34 -4\SFT401.txt unknown Seq: 14 2-OCT-13 8:46 5 n.2 (Robert W. Crandall & James H. Alleman eds., 2002). 9 9 note 32, at 535. 2 ELECOMMUNICATIONS supra T , ROADBAND LOBAL B ISCUSI , such as operating systems (manufactured by Microsoft, Mac OS, Unix, Linux, and , such as operating systems (manufactured , G in , The transistor, invented by AT&T’s Bell Labs, allowed the develop- The transistor, invented by AT&T’s The “French Telephone,” available in this country in 1 country in this available Telephone,” “French The sys- from human operators to electromechanical Switches changed 36. of 200 kilobits a second both upstream and Broadband is a connection capable 35. four The computer industry also has seen subdevelopments, as well. There are 34. V KOPEC S and routers used to connect individual computers (manufactured by Cisco Systems, 3Com, and routers used to connect individual computers (manufactured by Cisco Systems, Northern Telecom/Bay Networks, and Cabletron Systems); and (4) an offshoot of the ARPANET developed by the federal government for an offshoot of the ARPANET developed along with wireless commu- military and scientific purposes, threatens, wireline services provided by AT&T nications, to displace the historic and its offspring. downstream. Robert W. Crandall et al., nals, plus associated peripherals such as printers, scanners, and bulk storage devices nals, plus associated peripherals such as Unisys, and Fujitsu; workstation are manu- (mainframes are manufactured IBM, Hitachi, IBM, Compaq/Digital, and Silicon Graph- factured by Sun-Microsystems, Hewlett-Packard, IBM, Hewlett-Packard, and Gateway); (2) ics; PCs are manufactured by Compaq, Dell, Sciences, GE Capital ITS, and Science Applications). T transmit data has enabled the nearly instantaneous transmission of transmit data has enabled the financial sector. commercial data, particularly in the components to a computer system: (1) OS/2 warp) and application programs, such as word processing, spreadsheet, and database OS/2 warp) and application programs, such resource planning software (manufactured by programs, as well as specialized enterprise Baan); (3) SAP, Oracle, PeopleSoft, J.D. Edwards, and gration, and data processing services ment of the modern-day cell phone. The computer aided telecommunica- ment of the modern-day cell phone. tions in various ways. a transmitter and receiver in one handset. and receiver a transmitter a the Hush-a-Phone, Later, and the to provide privacy, to a phone mouthpiece attached harmless for use to the landline system a radio a device connecting Carterphone, devices not AT&T to allow workers, forced field maintenance by utilities’ to be con- Western Electric subsidiary by its wholly-owned manufactured system.nected to the phone ex- The result proved that manufacturing well. essential for the system to function clusivity was not PBXs. Long distance systems to digital systems and tems to crossbar and multiplexing to from copper wire to coaxial cable technology went fiber. satellites to optical microwaves to geostationary Open-wire line coaxial cable (below- pole-to-pole connections) and system (above-ground, vehicles until wires) were the only transmission ground, larger-capacity came on stream. De- II, when microwave transmission after World War transmission commercial use after WWII, microwave veloped for private to be transmitted inexpensively allowed a large quantity of information over a long distance. lation software 526 LAW & INFORMATION OF COMPUTER JOURNAL [Vol. XXIX \\jciprod01\productn\S\SFT\2 33953-sft_29-4 Sheet No. 9 Side B 10/02/2013 12:46:52 10/02/2013 9 Side B Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 10 Side A 10/02/2013 12:46:52 40s and early in 9 Those developments oc- Those developments 37 0. 9 NUMBER 5 -4\SFT401.txt unknown Seq: 15 2-OCT-13 8:46 9 note 6, at 188- 13 noted above, a settlement that left AT&T in its (near) 13 noted above, a settlement that THE ANTITRUST CASES AGAINST AT&T THE ANTITRUST supra 9 , IETOR 50s with a second antitrust suit. (At the request of the Defense 50s with a second antitrust suit. 9 No American company is a stranger to litigation (this is America, is a stranger to litigation No American company size gener- early in the twentieth century AT&T’s As noted above, late in the 1 The federal government tried again Technological innovations such as wireless communications under- communications as wireless such innovations Technological 37. V M K curred simultaneously with the first of two major restructurings of the major restructurings the first of two with curred simultaneously 10 item. next relevant Top industry, the telecommunications domestic for anything), and in a right to sue anyone else where everyone believes AT&T was no firm is a stranger to antitrust litigation. no large American exception. federal government. the public, the states, and the ated concern among could bring a suit under the At the time, only the federal government and private parties now can do so, Sherman Act against a firm (states one, challenging AT&T’s refusal to too), and the Justice Department filed telecommunications companies. AT&T interconnect with other smaller in the famous Kingsbury Com- and the government settled that lawsuit mitment of 1 and interstate communications. monopoly position in local exchange the 1 on hold for the Korean War.) This time Department, the lawsuit was put of Western Electric, the exclusive the focus was on AT&T’s ownership equipment. The government’s the- manufacturer of telecommunications only Western Electric’s products be ory was that, by demanding that phone service, AT&T had monopolized used in connection with AT&T’s equipment. But here, again, the the business of manufacturing phone than take it to trial. The Defense De- government settled the case rather that any breakup of AT&T would partment came to AT&T’s aid, arguing service deemed essen- create a risk of a disruption of telecommunications the Cold War. The settlement per- tial to the safety of the nation during as a wholly owned subsidiary, mitted AT&T to keep Western Electric to other firms, and prohibited required AT&T to license its patents industry. The first two elements of AT&T from entering the computer the settlement were designed to satisfy the Defense and Justice Depart- ments. The third element sought to please state regulators, by prevent- by ing AT&T from undercutting competition in the computer industry tele- cross-subsidizing that business via rate increases in its regulated cut the economies of scale on which the natural monopoly theory of natural monopoly on which the economies of scale cut the that as the cross-subsidies had rested, as well always telecom regulation regime. from the separations had resulted 2012] POINTS IN TELECOMMUNICATIONS TURNING 527 \\jciprod01\productn\S\SFT\2 C Y 33953-sft_29-4 Sheet No. 10 Side A 10/02/2013 12:46:52 A 10/02/2013 10 Side Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 10 Side B 10/02/2013 12:46:52 M K C Y TUDY IN 82 and 9 : A S YSTEM S 78), 524 F. Supp. 1336 ELL 9 B ALL OF THE , Maryland v. United States, 460 U.S. F aff’d HE , T 82), 9 ALAMBOS G This time, the federal government challenged the federal government This time, 54 antitrust settlement in what became known 54 antitrust settlement in what became 9 3 9 OUIS . ). note 17, at 240: 9 -4\SFT401.txt unknown Seq: 16 2-OCT-13 8:46 & L 8 9 9 38 The trial court approved the settlement agreement The trial court approved the settlement (1 supra EMIN 40 , 80s made any distinction between computer and communications 80s made any distinction between computer T 9 ROCK OLITICS ETER B P 81), 552 F. Supp. 131 (D.D.C. 1 9 83). There also were a variety of private antitrust suits against AT&T, but none of See 9 . 1314 (D.D.C. 1 United States v. AT&T, 461 F. Supp. The divestiture, which went into effect two years later, imposed a The divestiture, which went into AT&T made that decision in the third antitrust suit relevant here, suit relevant in the third antitrust that decision AT&T made 9 service appear artificial. Telephone companies routinely provided information ser- service appear artificial. Telephone companies through directory services, credit vices integrated into their ordinary operations no clear distinction between that type call validation, and 800 service. There was because they were aspects of providing of information service (classified as basic such as voice storage that were traditional telephone service) and newer services nontraditional services to the classified as enhanced because they provided consumers. The FCC’s decision to allow the integrated provision of enhanced services with The FCC’s decision to allow the integrated of determining the dividing line local exchange service originated in the difficulties of limiting technological advance. The between those classes of service and in fears into all phases of communication increasing integration of computer technology during the 1 40.lawsuit and settlement that lead to the break-up of For a detailed discussion of the 3 38. RICES AND them had the same effect as the federal government’s lawsuit. AT&T, see P 1001 (1 entered into an agreement that transformed the American telecom sys- entered into an agreement that transformed local exchanges and a long-dis- tem by breaking up AT&T into separate tance business. as violating the Sherman Act not only AT&T’s refusal to interconnect refusal to Act not only AT&T’s the Sherman as violating firms—includingwith other telecom the long distance new entrants into and Sprint—butfield, such as MCI that AT&T also the other actions long-distance traf- its monopolies in local exchange and took to maintain a less expensive to compete with MCI by offering fic, such as its attempt in lieu of a trial, For a third time, the case settled long-distance service. terms. The reasons case settled on the government’s but this time the in the government’s judge signaled that he would rule were that the trial would impose than more what remedies the judge favor, AT&T feared wanted to enter the Justice Department, and AT&T the ones sought by earlier antitrust set- which it could do only if the the computer industry, therefore came together in 1 tlement were modified. The parties (D.D.C. 1 as the Modification of Final Judgment, or MFJ. as the Modification of Final Judgment, were seen as the competitive long-dis- sharp dividing line between what exchange segments of the industry. Ac- tance and natural monopoly local carriers should be confined to cording to that theory, local exchange service and barred from participating offering monopoly local exchange and also modified the 1 P 528 LAW & INFORMATION OF COMPUTER JOURNAL settle- of the element this last Interestingly, services. communications [Vol. of its agree to the dissolution AT&T later to induced ment ultimately XXIX status. monolithic v. AT&T United States \\jciprod01\productn\S\SFT\2 33953-sft_29-4 Sheet No. 10 Side B 10/02/2013 12:46:52 B 10/02/2013 10 Side Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 11 Side A 10/02/2013 12:46:52 9 42 . 9 NUMBER 4 -4\SFT401.txt unknown Seq: 17 2-OCT-13 8:46 9 note 32, at 535. 60s, MCI came up with a new idea. MCI proposed offer- 60s, MCI came up with a new idea. note 17, at 217. AT&T was still subjected to price regulation after the note 17, at 217. AT&T was still subjected 9 supra supra , , note 32, at 540-43, 548-4 41 ISCUSI ROCK supra MICROWAVE TRANSMISSION, MOTOROLA, AND MCI MOTOROLA, AND MICROWAVE TRANSMISSION, , With a novel business plan, a little bit of money, and a boatload of plan, a little bit of money, With a novel business early promotion in the development and Motorola was instrumental But in the 1 42. V 41. B 84 breakup, because government officials feared that deregulation would lead to either of 84 breakup, because government officials feared M K ISCUSI 9 grit and determination, Microwave Communications, Inc. (“MCI”) proved Microwave Communications, grit and determination, that David still could beat Goliath. to the telecom world it helped to invent communication, which of microwave point-to-point War II. Both open- the War Department during World while working for and coaxial connections (above-ground, pole-to-pole) wire line system wires) had large fixed costs, so cable (below-ground, larger-capacity that regard. But the same was not true AT&T was a natural monopoly in Developed for private commer- with respect to microwave transmission. transmission allowed a large quantity cial use after the war, microwave over a long distance. After of information to be transmitted inexpensively to permit greater and greater use of the war, Motorola urged the FCC FCC then was unwilling to unseat microwave transmission, but the long-distance telecommunication ser- AT&T as the monopoly provider of used principally by utilities and al- vices. Microwave transmission was lied firms, such as oil and gas pipelines. two (conflicting) outcomes: Fear (1) – a price increase, because rivals could not offer the two (conflicting) outcomes: Fear (1) – a price decrease below predatory same services or quality of services as AT&T, or Fear (2) – were levels, as AT&T attempted to drive rivals from the field. Some believe that both fears was proved wrong. Fear (1) was proved wrong because the demand for telecom services price-sensitive, and the development of fiber optic cables greatly increased the available have supply of telecom transmission. Fear (2) was proved wrong because AT&T could not engaged in the type of self-ruinous price cutting necessary to drive MCI from the market. V 1 ing companies the ability to communicate internally between Chicago, ing companies the ability to communicate subscribing to its system, rather than Illinois and St. Louis, Missouri by AT&T for the same purpose. AT&T by purchasing a private line from AT&T argued that allowing a rival to vigorously opposed MCI’s proposal. service would enable it to “skim the operate only an interstate phone by underpricing the artificially high cream” from the telecom business 2012] services. or information manufacturing, long-distance, in competitive POINTS IN TELECOMMUNICATIONS TURNING gener- should be unregulated, markets in the competitive Participants purchase carriers, and should local exchange with the ally unaffiliated nondiscrimi- carriers on a the local exchange services from needed local 52 controlled by inputs for those monopolized with prices natory basis, regulation. \\jciprod01\productn\S\SFT\2 C Y 33953-sft_29-4 Sheet No. 11 Side A 10/02/2013 12:46:52 A 10/02/2013 11 Side Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 11 Side B 10/02/2013 12:46:52 M K 34 C Y 9 6 54 an- 9 99 34, the 1 9 34 Act was Congress’ 9 The 1 45 34 and the Telecommunications Act 9 34, ch. 652, 48 Stat. 1064 (codified as amended 9 34 was not controversial. Written by the 34 was not controversial. Written early in FDR’s Administration as one of early in FDR’s Administration as NUMBER 3 9 43 The common carrier provisions of the 1 The common carrier provisions of 34 44 9 -4\SFT401.txt unknown Seq: 18 2-OCT-13 8:46 9 note 6, at 176. supra , 34 AND THE TELECOMMUNICATIONS ACT OF 1 34 AND THE TELECOMMUNICATIONS 9 THE FEDERAL GOVERNMENT’S TWO PRINCIPAL THE FEDERAL GOVERNMENT’S IETOR 6 are the two most important pieces of telecommunications regula- 6 are the two most important pieces OF 1 MCI’s importance lies not in its ability to compete away customers lies not in its ability to compete MCI’s importance The Communications Act of 1 99 45. were the following: (1) Common carriers The primary common carrier provisions 43. 1 Federal Communications Act of 44. V TELECOMMUNICATIONS LAWS: THE COMMUNICATIONS ACT TELECOMMUNICATIONS LAWS: many examples of what was the then prevailing theory of regulation. many examples of what was the The Communications Act of 1 law after little debate. The consensus Administration, the act became remain a privately owned and oper- was that the Bell Company should ated regulated monopoly. Act were based on analogous provisions of the Interstate Commerce Act Act were based on analogous provisions that had been written for the railroads. were obliged to serve all who request service; (2) the FCC had the right to require intercon- (4) nection when it deemed it necessary; (3) telephone rates had to be just and reasonable; unreasonable discrimination was prohibited; (5) publicly available tariffs for communica- at 47 U.S.C. § 151 (2006)). titrust settlement, and the years of deeming AT&T the sole provider of titrust settlement, and the years It was that re-examination which American telecommunication services. communities that the American persuaded the political and legal prosper, without one firm being in telecom system could survive, even charge of the entire end-to-end process. 530 LAW & INFORMATION OF COMPUTER JOURNAL for to charge forced AT&T had regulators state FCC and that the prices [Vol.exchange ser- local to subsidize lower-priced service in order interstate XXIX the federal in the FCC and of skirmishing after years vice. Nonetheless, Louis to offer its Chicago-St. was able courts, MCI ultimately appellate service—whichby linking together to expand immediately sought it exchange with AT&T’s local interconnecting as well as by other cities, efforts, ultimately be- successful yet again in those services. MCI was of the long- major challengers to AT&T’s dominance coming one of the market. distance telecommunications carrier long remained the dominant long-distance from AT&T; the latter in telecom that line of work. No, MCI’s importance after MCI entered of the FCC and the the government, in the form history was in forcing underpinnings of the re-examine the unstated legal federal courts, to on AT&T via the that the government had bestowed telecom monopoly of 1 the Communications Act Kingsbury Commitment, \\jciprod01\productn\S\SFT\2 of 1 century. Congress passed the tion enacted by Congress in the twentieth Communications Act of 1 33953-sft_29-4 Sheet No. 11 Side B 10/02/2013 12:46:52 B 10/02/2013 11 Side Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 12 Side A 10/02/2013 12:46:52 2-OCT-13 8:46 was a response 46 6 9 : The Act sought to : The Act 99 84 MFJ, once the ILECs First 47 9 84 MFJ, known as Incumbent 84 MFJ, known 9 : The Act required the “Baby Bells” : The Act required 6 together proved to be quite controver- 99 Second ) existing facilities could be extended only after the FCC ) existing facilities could be extended only 9 ., its local exchange trunks, switches, etc.), on a trunks, switches, etc.), on ., its local exchange -4\SFT401.txt unknown Seq: 1 note 16, at 772. 9 e.g supra , : The Act sought to increase competition in the long distance : The Act sought to increase competition note 17, at 51-52. 6 Act had several major components. several major 6 Act had ENJAMIN supra 99 : The Act allowed CLECs to rent various separate elements of an CLECs to rent various separate : The Act allowed Fourth , The interconnection and intercarrier compensation features of the The interconnection and intercarrier By contrast, the Telecommunications Act of 1 Act the Telecommunications By contrast, 46. Pub. L. No. 104 § 601(b)(2), 110 Stat. 56 (codified as amended at 47 U.S.C. § 151 47. B M K ROCK to changing technologies and market conditions that rendered obsolete that rendered and market conditions technologies to changing industry. of the telecom cross-subsidy features monopoly and the natural The 1 increase competition in the local exchange market by lifting all state- in the local exchange market increase competition to entry. imposed barriers Local Exchange Carriers (ILECs), to interconnect for local service with Carriers (ILECs), to interconnect Local Exchange Carriers (CLECs). as Competitive Local Exchange the new rivals, known split off from AT&T pursuant to the 1 split off from AT&T piece-by-piece basis, a practice known as purchasing Unbundled Net- a practice known as purchasing piece-by-piece basis, a practice known as or the entire system altogether, work Elements, Network Elements—Platformpurchasing Unbundled or UNE-P. Com- to a formula to be determined by the pensation was to be paid according FCC. could prove to the FCC’s satisfaction that there was adequate competi- could prove to the FCC’s satisfaction service. tion in their regions for local exchange market by allowing ILECs to compete for long-distance service, thereby market by allowing ILECs to compete by the 1 lifting the ban on such entry imposed (2006)). ILEC’s business ( ILEC’s business Telecommunications Act of 1 that the FCC adopted for intercar- sial. A major reason was the formula Long-Run Incremental Cost rier compensation, the Total Element a forward-looking cost methodology (TELRIC) formula. TELRIC was unbundled network elements (UNE). used to price an ILEC’s separate, prohibited the FCC from using an The problem was that Congress methodology, even though history- ILEC’s historical costs as its pricing methodology throughout the twen- based pricing had been the prevailing issued a certificate of “present or future public convenience and necessity” justified the issued a certificate of “present or future and extension; (10) the FCC was given the authority to prescribe the accounting system compel depreciation schedule for carriers; (11) the FCC was given extensive authority to information from carriers; (12) the act created a seven- member commission (later reduced cause. to five members) who held office for seven years and who could be removed only for B tions charges had to be filed and applied in a nondiscriminatory manner; (6) the FCC could tions charges had to be filed and applied in investigate and hold a hearing regarding their suspend tariffs for up to five months to prescribe tariffs after a hearing; (8) the FCC had lawfulness; (7) the FCC had the power to after a hearing, award damages, instead of the authority to investigate complaints and, bringing an action in court; ( Third 2012] its by entrusting service POTS monopoly AT&T’s to regulate attempt POINTS IN TELECOMMUNICATIONS TURNING FCC. care to the 531 \\jciprod01\productn\S\SFT\2 C Y 33953-sft_29-4 Sheet No. 12 Side A 10/02/2013 12:46:52 A 10/02/2013 12 Side Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 12 Side B 10/02/2013 12:46:52 M K 50 C Y , in ENNIS IGITAL 9 4 , D & D OMPETITION ELECOMMUNI- C T EISER App. A, at 431- Competition and in EHMAN GE , A J. W ANAGED E. L M 51 note 36, at 157, 177-85; The Financial Effects of HILIP ALE OF ” NTERNET I & P supra , OSTS 6, which prohibited using 6, which prohibited 8, 22-23 (Martin Cave & Robert W. “C 99 HE , 151; Charles L. Jackson, Wired High- 9 ROADBAND 6: T OLICY IN THE TLANTIC B UECHTERLEIN 99 note 36, at 245, 252-54 (describing UNE-P P A 1 in , , 148-4 9 E. N supra CT OF , A note 36, at 83, 100-01; Robert W. Crandall & Martin note 36, at 83, 100-01; Robert W. Crandall , 136-3 IDES OF THE 9 ONATHAN S J supra WO , ROADBAND B See T -4\SFT401.txt unknown Seq: 20 2-OCT-13 8:46 ELECOMMUNICATIONS 9 in T , Instead, the elements of the TELRIC pricing formula pricing TELRIC of the elements the Instead, ROADBAND note 36, at 12 Internet-Related Services: The Results of Asymmetric Regulation Internet-Related Services: The Results of -80. Historical costs would not necessarily yield higher prices than for- 48 B 9 ELECOMMUNICATIONS , George Bittlingmayer & Thomas W. Hazlet, , George Bittlingmayer & Thomas W. Hazlet, MERICAN in T supra : A Telecommunications Policy Reform in the U.S. and Canada HE , . at 77 . . CATIONS IBERALIZATION ON , T Id Id Id See, e.g. L . (2000). For example, the UNE-P and TELRIC rules have a “margin spread” effect on Congress’ decision put the FCC in a bind. On the one hand, if the On the one hand, FCC in a bind. decision put the Congress’ 9 For a discussion of how the UNE-P and TELRIC pricing rules undermined the benefits 4 50. 51. 48. 99 EISMAN ROADBAND ROSSROADS B 53 (2007). Jerry Hausman, Crandall eds., 2001). of and the “deal” that was a part of price cap regulation, see D and TELRIC as “the tragedy of the commons”); Howard A. Shelanski, and TELRIC as “the tragedy of the commons”); W. Hazlett, Speed Access, were (1) the marginal cost of servicing a CLEC; (2) a proportion of depre- (2) a proportion of servicing a CLEC; the marginal cost were (1) of overhead; share (3) a proportionate facilities equipment; ciation for in the element. cost of capital invested share of the and (4) some ward-looking costs; it depended on the inputs and the amount of depreciation for existing ward-looking costs; it depended on the inputs a forward-looking (replacement) methodol- facilities. For that reason, some BOCs proposed than TELRIC’s.ogy, but with more realistic assumptions of the Moreover, components of (forward-looking) fixed costs and permitted TELRIC inquiry did require a calculation fixed costs from CLECs to the extent the CLECs ILECs to recover a pro rata share of those used an ILEC’s capacity. Broadband Regulation Regulation in Broadband Communications FCC allowed an ILEC to recover its fixed costs, then the FCC would have then the FCC its fixed costs, an ILEC to recover FCC allowed Act of 1 violated the Telecommunications been underused, be- network elements would have historical costs. The pricing mechanism. cost-pricing is the most efficient cause marginal even if there already have built their own facilities And, CLECs would available. But on the amount of facilities equipment was an adequate recover its historical FCC did not allow an ILEC to other hand, if the The ILEC would be would suffer a loss of fixed cost. costs, then the ILEC development, because money on research and deterred from spending CLECs might be de- could not be recaptured. Even those expenditures and develop- money on construction or research terred from spending would be treated as ILECs. ment, for fear that they eventually an incumbent due to the “output effect” and “input effect.” The output effect occurs when a an incumbent due to the “output effect” and “input effect.” The output effect occurs when W 85- C Accordingly, the FCC’s UNE-P and TELRIC rules were vocally criticized Accordingly, the FCC’s UNE-P and created a disincentive to CLECs to by the ILECs on the ground that they ILECs to invest in new ones, and, by create their own facilities and to hurt the public. creating such disincentives, thereby 532 LAW & INFORMATION OF COMPUTER JOURNAL century. tieth [Vol. XXIX \\jciprod01\productn\S\SFT\2 33953-sft_29-4 Sheet No. 12 Side B 10/02/2013 12:46:52 B 10/02/2013 12 Side Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 13 Side A 10/02/2013 12:46:52 6 99 for his , Mar. 10, 9 but that 0 9 52 525.html. 9 CONOMIST , E _3-566 9 F.3d 554 (D.C. Cir. 2004). 9 ); U.S. Telecom Ass’n v. FCC, More Cell Phones, Less Satisfac- Moreover, the post-1 Moreover, 999 53 ) (citing a Forrester Research study)) http:// A Spiritual Connection PM NUMBER 2 CELLULAR TECHNOLOGY -4\SFT401.txt unknown Seq: 21 2-OCT-13 8:46 9 (Apr. 13, 2005, 12:55 6 Telecom Act rules, such as ones relating to legacy ele- as ones relating Act rules, such 6 Telecom COM . 99 EWS , cell phones, BlackBerries, iPhones, and the like – have re- and the like , cell phones, BlackBerries, iPhones, – WIRELESS COMMUNICATION AND ITS USE IN WIRELESS COMMUNICATION e.g. 54 Guglielmo Marconi won the Nobel Prize for Physics in 1 Guglielmo Marconi won the Nobel It is difficult to overstate the impact of wireless communications on It is difficult to overstate the impact That controversy (and some others) died down over the ensuing dec- ensuing over the down died some others) (and controversy That , CNET N 52. Verizon Commc’ns, Inc. v. FCC, 535 U.S. 467 (2002). 53. 525 U.S. 366 (1 AT&T Corp. v. Iowa Utils. Bd., 54. noted, “When you leave your house, you probably As the Economist magazine has 0 F.3d 415 (D.C. Cir. 2002); U.S. Telecom Ass’n v. FCC, 35 M K 9 2005. According to one study, two-thirds of all U.S. households have at least one cellphone, with many having more than one. CNET News.com Staff, ments of the telephone network (e.g., capacity on circuit switches and the on circuit switches (e.g., capacity the telephone network ments of the copper loop). portion of high-frequency Court and the federal circuit courts struck down other aspects of the down other aspects courts struck the federal circuit Court and FCC’s post-1 Act growth in wireless communication, the use of fiber optic lines for communication, the use of Act growth in wireless AT&T and MCI by video services, the acquisition of voice, data, and Verizon Communica- renamed as AT&T, and ILECs (SBC, immediately communication and the explosion in Internet tions Inc., respectively) – FCC’s post-Act rules to dampen the effect of the all those factors worked will do to address is unclear what, if anything Congress on the ILECs. It telecom landscape. the current, dramatically-changed news.cnet.com/More-cell-phones%2C-less-satisfaction/21000-103 contributions to wireless telegraphy, an invention with even greater po- contributions to wireless telegraphy, than the telegraph or telephone, tential for long-distance communication between points that are because wireless devices allow communications physically. At one time principally impossible or impracticable to connect or inter-ship voice traffic or by used by civilian vessels for ship-to-shore wireless communication de- the military for battlefield communications, vices – shaped the telecommunications market in ways unrecognizable to Ma shaped the telecommunications market established, mass-market consumer Bell. Wireless phones now are an device. today’s telecom world. Wireless technology has freed individuals from today’s telecom world. Wireless ade. The Supreme Court upheld use of the TELRIC formula, upheld use of the Supreme Court ade. The tion 2 CLEC is allowed to price one service, such as long distance service, below what an ILEC is CLEC is allowed to price one service, such the cost of other services, such as local service. forced to charge as a means of keeping low decision to allow MCI to enter only the long (That is what occurred to AT&T from the FCC’s calls below the price that AT&T could charge.) distance market and to price long distance to sell its services to a CLEC at a rate below The input effect occurs when an ILEC is forced pricing, rather than historical rates and costs. its costs by using TELRIC forward-looking take your keys, your wallet and your phone.” 2012] POINTS IN TELECOMMUNICATIONS TURNING 533 \\jciprod01\productn\S\SFT\2 C Y 33953-sft_29-4 Sheet No. 13 Side A 10/02/2013 12:46:52 A 10/02/2013 13 Side Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 13 Side B 10/02/2013 12:46:52 M K C Y 2 (2005). Indeed, note 36, at 56 supra ESEARCH , R Americas: Telecom Wire- QUITY Transfer of Coverage: We NTREPRENEURSHIP AND THE 6. Their effect is such ROADBAND , E : E B 99 in NYWHERE , A 7 introduction by AT&T of a per by AT&T 7 introduction note 36, at 106, 125. 99 NYTIME CIBC World Markets supra 1 (2005). One researcher has estimated that, by , , , A predicted that within five years telecom predicted that within five years In other nations, wireless communication In other nations, 57 (2002); Jerry Hausman, ESEARCH ALAMBOS R Wireless technology also has led to a revolution technology also Wireless ROADBAND G B ORLD 55 -4\SFT401.txt unknown Seq: 22 2-OCT-13 8:46 in W 9 QUITY OUIS , E The Economist IRELESS ACHS W S OLDMAN The growth in wireless communication and the Internet are the two The growth in wireless communication , G 57. Jerry Hausman, 56.of adults A 2004 survey done for the Centers for Disease Control found that 5.5% 55. of the For a discussion of the development of wireless technology and the growth REATION OF A 106, 117-18. in the second half of 2004, up from 4.4% in lived in households with only wireless phones half of 2003. Stephen Blumberg, Household the first half of 2004 and 2.8% in the first the US in 2004, Presented at U.S. Household Telephone Service and Usage Patterns in on Cell Phone Usage, (June 16, 2005). The rate Telephone Usage Patterns in 2004: A Focus with roughly 14% of 18-24 year-olds living in among younger users appears much higher, analyst, most wireless-only users do not actu- wireless-only households. According to one when ally cancel their wireline service; instead, they simply never sign up for wireline making an initial phone service decision. Jason Armstrong, et al., some economists have estimated that a shift of only ten percent from have estimated that a shift of only some economists creates a sufficient communications in America wireline to wireless of wireline competition to justify deregulation amount of intermodal altogether. communications the end of 2004, there were more wireless subscribers (184 million) than wireline subscrib- ers (176 million) in the United States. Timothy Horan, et al., companies would offer wireline service as a free add-on whenever a cus- companies would offer wireline service or fiber optic video service. That tomer purchased wireless, broadband, prospect that Ma Bell’s old landlines day has not yet arrived, but the that, in 2006, devices have enable governments – such as the new government of Iraq devices have enable governments – – (and expensive) wireline com- to leap-frog over the build-out of extensive their first opportunity for intra- and munications trunks and give people constructing cell towers, instead. international communications by developments since the most recent and dramatic telecommunications Act of 1 enactment of the Telecommunications in communications pricing. The 1 pricing. in communications month bundle of minutes billed at one price transformed telecommunica- billed at one price of minutes month bundle in geographic terms historically had been defined tions pricing, which companies also offer traffic). Telecommunications (local vs. long distance Internet, and “bundles” his wireless, wireline, a discount if a consumer into one package.television services par- Moreover, we are witnessing, permanent transition and new cell phone users, a ticularly among young devices. phones exclusively to wireless away from wireline less Favor Wireless and Cable Over Wireline wireless industry, see L C 534 LAW & INFORMATION OF COMPUTER JOURNAL boundaries the once-rigid has obliterated trunks, and phones landline [Vol. made data services, and has long-distance local exchange and between XXIX in the United everywhere to nearly everyone services available and video the world. States and \\jciprod01\productn\S\SFT\2 33953-sft_29-4 Sheet No. 13 Side B 10/02/2013 12:46:52 B 10/02/2013 13 Side Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 14 Side A 10/02/2013 12:46:52 , 28 ., the belief that telephone AIL viz V 58 8. HEODORE 9 NUMBER 1 NUMBER A. T ). 60 Theodore N. Vail and the Civic Origins of Universal Service note 16, at 6 999 -4\SFT401.txt unknown Seq: 23 2-OCT-13 8:46 9 supra . 71 (1 , IST . H A TIE THE INTERNET VAIL AND THEODORE – ENJAMIN . at 71-74. CON Id John explains that historians have offered several explanations John explains that historians have 9 . Richard R. John, 5 John has a different view. In his opinion, the civic rationale for na- John has a different view. In his Alexander Graham Bell invented the telephone, but Theodore Vail Bell invented the telephone, but Alexander Graham theories regarding the develop- Richard John discusses the different There is a tie for the Number 1 spot between Theodore Vail and the the Number 1 spot between Theodore There is a tie for 9 . & E 5 60. 58. B M K US B use ought to be available to all Americans across one nationwide sys- use ought to be available to all tem. for the origins of universal service in America: (1) AT&T’s universal ser- for the origins of universal service combination of technological virtuosity vice was “attributable to a unique key turning point was the acquisition and visionary leadership;” (2) “a an event that set the stage for 1881 [by AT&T] of Western Electric in – (3) establishment of close re- Bell’s preeminence in industrial research;” and the AT&T long-lines divi- lations between the operating companies “an ‘almost irrational’ commitment sion; (4) “skillful entrepreneurship,” cooperation of state regulatory bod- to interconnection,” and “the active work of entrepreneurs who, after the ies;” (5) the daring, imaginative telephone systems in regions not expiration of Bell’s patents, established the use by ordinary Americans of the served by Bell Telephone; and (6) America not just politically and eco- telephone as a means of connecting nomically, but socially. tionwide development of the U.S. Postal Service also underlays the tionwide development of the U.S. Postal Service also underlays growth of the telephone network. According to John, Gardiner Greene created the Bell System and the concept of “universal service” – “One service” System and the concept of “universal created the Bell – service” Vail Universal Service.” By “universal Policy, One System, is meant by that term today—namely,meant, not what the principle telephone service—butthat everyone has the right to inexpensive that only one telephone company—the Bell Company—would supply tele- phone service in the United States. service: ment of the concept of universal 2012] two-way Tracey’s to Dick switch use as consumers from disappear would POINTS IN TELECOMMUNICATIONS TURNING dream. just a comic book is no longer “wrist radios” 535 \\jciprod01\productn\S\SFT\2 Internet. on the for starting telecommunications Vail wins the award while the In- for most of the twentieth century, path that it followed than even Vail could baton possibly to newer heights ternet takes the have imagined. C Y 33953-sft_29-4 Sheet No. 14 Side A 10/02/2013 12:46:52 A 10/02/2013 14 Side Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 14 Side B 10/02/2013 12:46:52 M K C Y ., expand viz 64 note 3, at 283. 62 supra , -4\SFT401.txt unknown Seq: 24 2-OCT-13 8:46 9 RANSFORMED . . In John’s words: 9 T 99 61 1- 9 Vail was in charge when the Bell Company entered into the Vail was in charge when the Bell ATION . at 74-7 . at . at 284-85. 63 Id Id Id [T]he nation’s telephone network evolved from the basic information in- network evolved from the basic [T]he nation’s telephone its from the U.S. Postal System, Industrial Age frastructure of the – entrepre- Service, and Western Union. The creative U.S. Railway Mail Vail. His for this evolution was Theodore Newton neur most responsible organizations how technologies, people, and story vividly illustrates – evolved consecutively learning and experiences and their collective – and resulting organiza- over time, how the technological infrastructures these infrastructures and tional system (and those involved creating blocks of the emerging In- the resulting systems) became the building clear line of events suggests the formation Age. From Vail to today, a nature of continuity at work. actions to implement his “univer- Vail undertook a series of specific 63. 62. A N 64. 61. beyond its core business purposes and customers to reach all of the to reach purposes and customers core business beyond its from the hired away Vail, whom Hubbard public. Theodore American of the Railway he was General Superintendent Postal Service (where telephone network at Bell Telephone, modeled the Mail Service) to work not as a means network. Vail saw universal service, on the Postal Service national communica- but as a means of creating a of stifling competition, tions system. Kingsbury Commitment with the federal government and thereafter Kingsbury Commitment with the his second tour at the Bell Company, built out its telephone network. In which began as the long-distance Vail became the first head of AT&T, eventually became the parent com- subsidiary of Bell Telephone, but largest corporation, ahead of the pany. AT&T became the nation’s second Standard Oil Company of New Jersey and behind only the United States Steel Corporation, which AT&T later overtook. sal service” vision. Vail won every patent case brought by or against the sal service” vision. Vail won every Union set- Bell Telephone–Western Bell Company, and he midwifed the enhanced capitalization of the Bell tlement. He helped to achieve the of J.P. Morgan. Vail oversaw Bell’s Company by securing the backing then a leading manufacturer of 1881 acquisition of Western Electric, Western Union for a decade, and electrical equipment, associated with Labs, perhaps America’s greatest cor- which ultimately gave birth to Bell of expanding Bell’s interstate net- porate R&D arm. A strong supporter the network operation of the Postal work and heavily influenced by System, 536 LAW & INFORMATION OF COMPUTER JOURNAL promoter early and an Bell Graham of Alexander a confidant Hubbard, [Vol. democratic to realize the the telegraph failed saw that of the telephone, XXIX system on a to put the Bell and sought of the Postal Service potential had failed to do: the telegraph to accomplish what trajectory \\jciprod01\productn\S\SFT\2 33953-sft_29-4 Sheet No. 14 Side B 10/02/2013 12:46:52 B 10/02/2013 14 Side Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 15 Side A 10/02/2013 12:46:52 Sec- RANS- T ATION 65 : Vail sought to enhance the reach to enhance : Vail sought 2). 99 First 66 13 Kingsbury Commitment, in which he agreed 13 Kingsbury Commitment, in which 5, 101-26 (1 9 9 . Theodore N. Vail and the Role of Innovation in the Modern Bell -4\SFT401.txt unknown Seq: 25 2-OCT-13 8:46 9 EV : Vail sought to develop and introduce new technolo- : Vail sought to develop . R IST Third . H note 3, at 285-86. US FORMED , at 102-04. The vision that Vail had and the steps that he took to implement supra Id. , , 66 B In sum, Vail took a successful telephone company, changed it into In sum, Vail took a successful telephone Vail successfully defeated the political attempts to weaken Bell’s Vail successfully defeated the political Why and how did Vail adopt this strategy? Vail foresaw the rise of the rise foresaw Vail this strategy? adopt did Vail and how Why : Vail sought to establish Western Electric as the dominant telephone Western Electric as the dominant : Vail sought to establish 66. 65. Louis Galambos, M K and dominance of Bell’s local and long distance telephone service by en- telephone and long distance of Bell’s local and dominance to interconnect with innovation and refusing couraging technological to sell out to Bell. thereby encouraging them other phone companies, gies by the internal development of new equipment in what later became development of new equipment gies by the internal of telecommunica- the need for standardization Bell Labs, by stressing standard that thereby effectively creating a national tions equipment, of new tech- could satisfy, and by the introduction only Bell equipment basis. nology on a carefully phased-in, system-wide “universal service” established the framework within later actions fit. A N the world’s preeminent telephone company by overcoming or acquiring the world’s preeminent telephone adopted and craftily-structured his rivals, and, through a few wisely and political effort by all branches of compromises, defeated every legal to disassemble or limit his creation. In the federal and state governments company, Vail certainly ranks making AT&T into an iconic American giants of twentieth century American with Henry Ford as one of the business. hold over telecommunications. To pacify state officials, Vail agreed to hold over telecommunications. To service. To satisfy federal officials, state regulation of price, profits, and Vail entered into the 1 competition once Bell’s patents had expired and sought to maintain and sought patents had expired once Bell’s competition techno- the Bell Company’s by strengthening position AT&T’s dominant Vail’s industry. in the telecommunications business positions logical and had three components. strategy every telephone thereby effectively forcing equipment manufacturer, from West- up by Bell to purchase its equipment company not snatched ern Electric. it had acquired, to cease acquiring to divest Bell of Western Union, which and to offer long-distance service new independent telephone companies, that wanted to interconnect with the to any other telephone company the Kingsbury Commitment, although Bell system. That last element of of refusing to allow interconnection, a change from the prior Bell policy surmised, because it let smaller, inde- worked to Bell’s advantage, Vail densely populated, less affluent ru- pendent companies develop the less with them as part of Vail’s ral areas of America while still connecting notion of “universal service.” System 2012] POINTS IN TELECOMMUNICATIONS TURNING 537 \\jciprod01\productn\S\SFT\2 ond C Y 33953-sft_29-4 Sheet No. 15 Side A 10/02/2013 12:46:52 A 10/02/2013 15 Side Sheet No. 33953-sft_29-4 33953-sft_29-4 Sheet No. 15 Side B 10/02/2013 12:46:52 M K C Y 67 7). For an excellent discussion of 99 -50 (1 9 note 48. NTERNET I supra HE , CONCLUSION EISER B. T & W it, there is no cost for people to use it—except it, there is no cost for people to use what -4\SFT401.txt unknown Seq: 26 2-OCT-13 8:46 9 owns UECHTERLEIN , Reno v. ACLU, 521 U.S. 844, 84 e.g. , See I promised you the top ten persons, inventions, or events in the his- I promised you the top ten persons, The Internet has been a truly revolutionary development.The Internet has At a The Internet is an international network of interconnected com- of interconnected network is an international The Internet 67. you pay your carrier to access it. tory of telecommunications, and I delivered eleven.tory of telecommunications, and So sue me. a diverse and, in my opinion, compre- Whatever the number, the list is mod- hensive set of the most important factors that have led to today’s ern, worldwide telecom industry. the importance of the Internet, and of the history, policy, and law of telecommunications generally, see N plebian level, the Internet enables consumers to shop for goods nation- Internet enables consumers to shop plebian level, the means of lowering the from the manufacturer as a wide and buy directly cost of purchasing an item. At a more patrician level, the Internet en- author and publisher of articles, ables everyone to become an online or anything else that can be reduced books, photographs, music, movies, to ones and zeros. And at a realpolitik level, the Internet enables dispa- each other in peacetime, to foment in- rate groups to communicate with in a rebellion like the one that we surrection, or to plan military moves witnessed occur in Libya in 2011. Add in the ability to access the In- like a smart phone and you have the ternet through handheld devices anywhere and while on the go.ability to manage (much of) life from Pay- playing Sudoku while sitting on the ing the rent, watching a movie, or very far, but the other, always-in- subway may not advance civilization will have just that effect.creasing uses of the Internet likely Think of and you have the Internet.the telegraph or telephone on steroids, Yet, because no one puters, “smart phones,” and the like that can communicate with each can communicate and the like that phones,” puters, “smart the globe.other across tele- “ARPANET,” a began as the The Internet Projects Advanced Research created by the program communications that the military Department of Defense to ensure Agency of the U.S. the event that a war civilians could communicate in and its supervising and transmission communications facilities destroyed ordinarily-used lines. model for the longer exists, but it served as the The ARPANET no to communicate with millions of people worldwide Internet, which links information, and to access vast amounts of stored one another, to from the manufacturer. purchase goods directly 538 LAW & INFORMATION OF COMPUTER JOURNAL [Vol. XXIX \\jciprod01\productn\S\SFT\2 33953-sft_29-4 Sheet No. 15 Side B 10/02/2013 12:46:52 B 10/02/2013 15 Side Sheet No. 33953-sft_29-4